BUCHAREST: Emerging European currencies weakened in cautious trade after an expected rate cut in the Czech Republic, with benign news Hungary had cleared its path toward signing an IMF-led financing deal were offset by pessimism on the upcoming EU summit.
The Czech central bank cut the key-two week repo rate by a 25 basis points to a new record low of 0.5 percent on Thursday, as expected by markets, to counter balance disinflationary risks in the shrinking economy.
"The rate cut itself should not have a significant effect on the CZK, in our view. However, if the decision is accompanied by strongly dovish comments, speculation for further monetary policy easing would likely support further EUR/CZK rally," said Vojtech Benda of ING.
The two-day European meeting is likely to produce a roadmap for fiscal, financial and political union and agree a package of growth-boosting measures, but emergency intervention to ease stresses in the bond markets look doubtful.
The International Monetary Fund has approved Hungary's proposed changes to its disputed central bank law to end a months-long dispute over the bank's independence and opening the door to talks on financial aid.
Such deal could create room for rate cuts and the pace of easing may accelerate if an accord is reached by the end of the summer, the central bank said in its inflation report on Thursday.
It could be signed by the end of October at the latest, the minister in charge the talks told Reuters in an interview.
By 1110 GMT the Hungarian forint was 0.3 percent down at 287.27 per euro while the Polish zloty traded 0.5 percent down at 4.283. The Czech crown and the Romanian leu were flat.
Czech Central bank Governor Miroslav Singer will hold a news conference to spell out reasons for the decision at 1230 GMT.
"The forint has appreciated a lot over the past period of time so the deal with the IMF had been fully priced in," said one Bucharest-based trader.
"The market doesn't have big expectations from the summit. The region is quite resilient to the dollar's appreciation against the euro recently. Today, the forint slips faster because players are closing short PLN/long HUF positions which were opened in waiting for the IMF endorsement."
With rates already at the lowest level in the European Union, the Czech central bank is expected to cut the key two-week repo rate to a fresh record low of 0.5 percent on Thursday, after more than two years of staying put.
In Poland, unexpectedly strong support among Poland's central bank policy makers for May's surprise interest rate hike has increased the chance of another rise this year despite slowing growth.
"Interest rate expectations are not important driver for the PLN now," said Piotr Bujak of Nordea Bank Polska S.A. "The global risk perception is the key driver."
"Besides, the market does not believe in a rate hike later this year there are growing expectations for a rate cut. PLN is the biggest loser when risk off happens."
Comments
Comments are closed for this article.